Sticking with GDP could be the best safeguard for nature

Tom Levitt

20th November, 2009

Although much maligned as a measurement of progress, some believe a Gross Domestic Product (GDP) measurement that includes natural capital could be the way forward

Economic growth is ‘destroying more than it is creating’, said French President Nicholas Sarkozy in September 2009 as he called for an end to what he described as ‘GDP fetishism’.

As others – including the New Economics Foundation – have indicated, our current GDP metric offers no indication of whether a country is becoming richer or poorer in terms of its natural resources.

And as Professor Tim Jackson, author of Prosperity Without Growth, points out, if the current rate of GDP growth continues the global economy will be 80 times the size it was in the 1950s by the end of the century.

‘It’s totally at odds with our scientific knowledge of the finite resource base and the fragile ecology on which we depend for survival…and has already been accompanied by the degradation of an estimated 60 per cent of the world’s ecosystems,’ says Jackson.

Valuing nature

So what is the best way to halt this degradation?

The Economics of Ecosystems and Biodiversity report (TEEB), a mammoth three-year project funded by a host of EU countries and published last week, argues that neglect and degradation comes from a failure to value ‘natural capital’ and include that within existing gross domestic product (GDP) calculations.

‘It is a psychological flaw in human thinking that does not understand that our existence depends on this place called earth,’ says the report’s lead author Paven Sukhdev, a senior banker at Deutsche Bank.

‘If you had a house you wouldn’t start taking it apart, burning your front door for fuel. You don’t destroy your home yet we are destroying our forests and seas.’

The TEEB report attempted to put a value on ecosystems services like forests, lakes, soils, water quality and fisheries. In the words of Sukhdev, ‘we only value what we can measure’.

Coral reefs, for example, are calculated to provide annual services to humans worth $1.2 million per hectare. In Venezuela, investment in the ‘national protected area’ system is preventing sedimentation that otherwise could reduce agricultural earnings by around $3.5 million a year.

The report also showed how this value could be shown in a balance sheet. Planting and protecting nearly 12,000 hectares of mangroves in Vietnam costs just over $1 million but saved annual expenditures on dyke maintenance of well over $7 million.

Retaining GDP

Sukhdev says that although patently inaccurate, retaining GDP but including within it additional natural capital flows was still the best way to protect the environment.

‘GDP is understood by both policy-makers and the general public – it is a single number that is simple to grasp and apply,’ he argues.

There are already measurements in existence that attempt to adjust for the shortcomings of GDP. The UN’s Human Development Index (HDI) is one; WWF’s Ecological Footprint, produced as part of its Living Planet report, is another.

These were both designed as alternative measures of progress.

Making politicians listen

However, Sukhdev argues that only by ‘monetising’ nature will policy-makers, governments and economists start properly valuing it.

‘Policy-making is about trade-offs. Often these trade-offs compare apples with oranges. By assigning monetary values to creation/depletion of natural capital, we can size and assess their unstated impacts on the economy, allowing for far more informed decision making and public debate.

‘GDP is just a flow of stocks and capital. If we include the flow of nutrients from forests – i.e. if we take timber, we will lose flood protection, air quality etc – then the net effect will be reflected on the balance sheet,’ says Sukhdev.

The Sarkozy-commissioned report on GDP led by U.S. economist Joseph Stiglitz explains this argument further:

‘If I have disinvested this year [in my natural capital] to finance my consumption, this implies that I am poorer at the end of the year. Eventually, I will have the possibility to do the same next year to maintain this level of consumption. But I know that I will not be able to do so indefinitely: one day or later, I will have to adjust my consumption demands.’

Treasury delay

So what’s the delay? The UK Treasury, seen by former government sustainability adviser Jonathon Porritt as a ‘barrier’ standing in the way of new approaches to economic measurement, says GDP is ‘crucial to all kinds of economic surveillance’, and that it wouldn’t act alone in changing the measurement.

The Office of National Statistics (ONS), which collects the data used in GDP measurements, accepted the criticisms that ‘impacts of logging, reduction of forests or mining of natural resources are currently viewed as additions to economic acticity within GDP’.

However, like the Treasury it said GDP as a measurement was defined and coordinated by the UN and that in the most recent update, due to be introduced in the next few years, there were ‘no significant changes to the framework related to the treatment of natural capital.’

‘There has been considerable research in developing alternative measures of GDP. These include environmental adjusted or ‘green’ GDP. But there is no agreed definition for these adjusted versions of GDP and these tend to be undertaken by research institutions rather than national statistical institutions,’ said a ONS spokesman.

There is however an environmental index being developed by the EU Commission as a result of its report, ‘Beyond GDP’, published earlier this year. The Commission plans to run a pilot of the index in 2010 and publish the results alongside standard GDP figures.

No more GDP

However, for some critics neither this parallel measurement nor Sukdev’s natural-capital adjusted GDP would be a satisfactory measure of progress.

‘You can improve GDP, make it more meaningful by including natural resources and that would send a signal to decision-makers about how they are managing their natural resources,’ admits Aniol Esteban, head of environmental economics at the New Economics Foundation.

‘However, this does not make it acceptable as the sole guiding measure of progress. Even with this natural resource flow it doesn’t tell you whether society is benefiting, whether peoples’ well-being is improving. It’s a step forward but still far away from the situation where national policy is guided by something other than just economic growth.’

Useful links
New Economics Foundation
EU Commission report, ‘Beyond GDP’
Prosperity Without Growth
The Economics of Ecosystems and Biodiversity report (TEEB)
The Happy Planet Index